Chastened by Sell-off, Malaysia Gets its Government Books in Order

Residents of a condominium complex switch on their lights in Shah Alam outside Kuala Lumpur, on Dec. 2. Electricity tariffs in Malaysia will rise by around 15 percent next year, the government said on Monday, as consumers and companies in the Southeast Asian nation feel the impact of moves to cut the country’s heavy fuel subsidy bill and reduce its budget deficit.

With memories of the summer selloff from emerging markets fresh in its mind, Malaysia’s government is taking steps to get its fiscal house in order and keep its coveted investment-grade credit rating.

The government said Monday it would raise electricity tariffs by almost 15%. That follows a move in October to scrap sugar subsidies and earlier cuts to subsidies on diesel and a widely-used gasoline variant, measures to tighten the government’s finances and fend off a prospective rating downgrade.

In July, Fitch Ratings cut the credit outlook on Malaysia’s A-minus rating to Negative from Stable, citing weak public finances and a need for reforms.

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Governments around Asia are using the delay in the Federal Reserve’s plan to scale back its massive bond-buying program to address deficiencies that came harshly to light in the summer selloff. Countries with current-account deficits were hit especially hard in the selloff, and may well bear the brunt again when the Federal Reserve does begin winding down its economic stimulus.

Malaysia is a prime example of a government scrambling to shore up its books. As the country’s current account surplus dwindled to a perilous 2.6 billion ringgit (US$812.5 million) in the second quarter, authorities staggered imports of heavy machinery and delayed large projects that have high import content and don’t offer immediate economic gain.

“Although fiscal consolidation is not expected to materially shift the current account position due to the large pipeline of investment projects coming online in 2014 and 2015, it may however change the perception of investors around the fiscal risks in Malaysia, which may help provide support to the capital account,” J.P. Morgan said in a research note.

Policy makers have been equally active on the fiscal front.

Malaysia keeps consumer prices for fuel, food and cooking oil artificially low — a policy that has strained government finances for decades and led to a continuous budget deficit since the Asian Financial Crisis of the late 1990s– funding the program primarily by borrowing in the local bond market. Government debt that has been above 50% of gross domestic product for the past five years — and is estimated to hit 54.8% this year — has added to investor worries.

After winning re-election in May, Prime Minister Najib Razak announced in October that the government would channel subsidies just to the poorest sections of the population. He also announced plans to introduce a goods-and-services tax in 2015 to boost government revenue.

Foreigners also are returning to Malaysia’s bond markets, adding 10.26 billion ringgit (US$3.15 billion) of debt to their portfolios in October alone, after foreign ownership of government bonds fell to 42.8% in the quarter ended Sept. 30 from 46.8% in the previous three months.

The hike in power tariffs and fuel prices is expected to push inflation next year above 3.0%, the upper limit of the central bank’s comfort level. Central bank Gov. Zeti Akhtar Aziz said Tuesday the bank will likely tolerate higher inflation if it’s expected to be temporary.

The central bank expects the economy to grow 4.5%-5.0% this year — down from 5.6% last year — but the global recovery now gaining traction has improved the longer-term outlook.

“We are not going to run the economy into the ground to get lower inflation,” Ms. Zeti said. “We want lower inflation in an environment of sustainable growth.”

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Indonesia Real Time provides analysis and insight into the region, which includes Singapore, Thailand, Indonesia, Vietnam, Malaysia, the Philippines, Myanmar, Cambodia, Laos and Brunei. Contact the editors at SEAsia@wsj.com.

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